According to a 2012 national study[1], “the average person in their 20s, 30s, and 40s who was given an inheritance or large financial gift quickly lost half the money through spending or poor investments.”[2] In response to the findings, Jay Zagorsky, the author of the study, said, “[t]he fact that people spent about half is disappointing in some ways, but not shocking.”[3] Zagorsky further states, “[m]aybe if you know in advance that most people spend half of their inheritances, you can prepare in advance and restrain yourself from spending that much.”[3]  

The following are suggestions for beneficiaries to keep in mind prior to spending their inheritance:

• Initiate a cooling-off period: Prior to making exorbitant purchases or promises, have a trusted financial advisor prepare an in-depth analysis of your financial picture.
• Consider funding an emergency savings account: Life happens, which is why, as a rule of thumb, you should have an emergency savings that covers between three to six months of living expenses.
• Pay off debts: When analyzing whether to pay off one debt over another, always consider what rate of return you would receive from an investment in the financial market. In other words, if the interest rate of the debt is larger than the expected return on an investment in the financial market, it is generally a good idea pay off that debt.
• Maximize retirement contributions: Lastly, if possible, use some of the inherited funds to prepare for your future by maximizing the annual contributions to your retirement account.  

[1] Zagorsky, J. L. (2012). Do People Save or Spend Their Inheritances? Understanding What Happens to Inherited Wealth. Journal of Family and Economic Issues, 34(1), 64-76. doi:10.1007/s10834-012-9299-y

[2] https://theconversation.com/how-winning-1-54-billion-in-mega-millions-could-still-lead-to-bankruptcy-105275

[3] https://news.osu.edu/most-americans-save-only-about-half-of-their-inheritances-study-finds—ohio-state-research-and-innovation-communications/

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